Kellanova kicked off 2024 with a strong first quarter, showcasing better than expected sales growth, profit margins, and cash flow.
The company is reaffirming its full-year guidance for 2024 with increased confidence due to over-delivery in Q1.
Organic growth in net sales was towards the top end of the long-term target range, primarily driven by pricing to offset currency devaluation.
Adjusted operating profit grew strongly year-on-year on a currency-neutral basis.
The company reported a 5% organic growth in net sales, predominantly due to price/mix adjustments.
Gross profit margin restoration is ahead of pace, contributing to the confidence in achieving a full-year outlook of more than 35%.
Operating profit margin is expected to be over 14% for the full year.
Earnings per share (EPS) growth in Q1 was attributable to growth in operating profit, with below-the-line items offsetting each other.
Free cash flow is off to a good start, supporting a deleveraged balance sheet and enhanced financial flexibility.
Regional Performance and Strategy
North America saw flat organic net sales in Q1, with operating profit increasing substantially due to productivity initiatives and improvements in service levels and logistics.
In Europe, organic net sales grew by 3% in Q1, with a modest sequential improvement in volume performance. Snacks led the growth in this region.
Latin America reported a 5% increase in organic net sales in Q1. The region experienced volume declines due to SKU rationalization and price pack architecture initiatives but saw a better-than-expected 10% increase in cereal net sales.
EMEA faced significant currency-driven pricing increases, particularly in Nigeria, leading to a 19% organic net sales growth in Q1. Operating profit grew by 29% on a currency-neutral basis.
Corporate Initiatives and Outlook
Kellanova is increasing its reinvestment in brands and capabilities, taking advantage of a strong Q1 to bolster its commercial activities and market performance.
The company continues to focus on growing responsibly, addressing food insecurity worldwide, and leveraging its brands to support communities.
Kellanova is progressing on network optimization projects and expanding Pringles capacity in emerging markets.
The 2024 financial guidance remains unchanged, with organic net sales growth expected to be 3% or better, and an operating profit range of $1.85 billion to $1.9 billion reaffirmed.
Summary
Kellanova has demonstrated solid financial performance in Q1 2024, with significant contributions from pricing strategies and productivity improvements across regions.
The company’s focus on differentiated growth, strategic reinvestment in brands, and operational efficiencies underpins its confidence in meeting or exceeding its full-year 2024 guidance.
Continued investment in emerging markets and strategic initiatives like expanding Pringles capacity highlight Kellanova’s commitment to long-term growth and shareholder value creation.
Question and Answer
Private Label Trends in Snacks and Crackers
Question
What is the company’s perspective on the recent gains in private label market share in the snacks and crackers categories, and how does it impact the outlook for the second and third quarters?
Answer
The company does not observe significant shifts in private label market share in these categories when considering the full data and noise, with private label’s performance appearing relatively stable.
Factors such as supply disruptions and bottlenecks last year may have temporarily boosted private label share, and non-measured channels, including away-from-home consumption, are growing faster, contributing to the overall picture.
Potential Improvement in Lower-Income Consumer Spending
Question
As the company laps the SNAP benefit reductions, what are the expectations for potential improvements in lower-income consumer spending and overall category performance?
Answer
The company anticipates an improvement in the back half of the year, particularly for lower-income consumers, as factors such as the restoration of SNAP benefits, student loan repayments, and an improving economic environment contribute to easing pressures.
The company’s volume performance is already showing signs of improvement, with a return to full merchandising activity and increased confidence in continued progress throughout the second quarter and into the back half of the year.
Transitional Services Agreement (TSA) Impact and Future Outlook
Question
What was the impact of the TSA on EBIT and gross profit, and how will this evolve in the coming quarters?
Answer
The TSA reimbursement was approximately $45 million, with around $35 million allocated to the gross profit line.
The company expects TSA costs to gradually decrease in the second quarter as distribution centers transition to WKKC, with a further reduction throughout 2024 and a full anniversary in the fourth quarter.
Consumer Behavior and Shifts in Food Consumption
Question
How is the company observing consumer behavior, particularly concerning lower-income consumers, and the potential shift from eating out to food at home?
Answer
The company acknowledges a trend of value-seeking behavior, with lower-income consumers eating out less and returning to at-home channels while still prioritizing affordability.
This behavior is expected to persist in the near term but may gradually ease as the back half of the year progresses, and discretionary income improves.
Q1 Performance and Full-Year Guidance
Question
With the first quarter results exceeding expectations, why is the guidance not being raised, and what are the key uncertainties for the remainder of the year?
Answer
While the strong first quarter performance instills confidence in a successful year, the company remains cautious due to the inherent uncertainties of the next three quarters.
The current position allows for increased reinvestment in areas such as route-to-market, digital transformation, and brand building, which will further support growth and brand momentum.
Mergers and Acquisitions (M&A) and Balance Sheet Health
Question
With a strong balance sheet and low leverage, what is the company’s appetite for M&A, and what are the potential areas of interest?
Answer
The company is open to M&A opportunities that create shareholder value but is equally excited about organic growth prospects, such as the international expansion of Cheez-It and capacity additions for Pringles.
North America Profitability and Cost Environment
Question
What factors contributed to the significant profit improvement in North America, and how will the cost environment evolve in subsequent quarters?
Answer
The strong performance in North America was driven by revenue growth actions, a moderating cost environment, and improved supply chain performance, with the lapping of last year’s bottlenecks being a significant factor.
While continued profit growth is expected throughout the year, the pace may moderate as the company laps the bulk of supply chain challenges and the impact of foreign exchange.
Full-Year Guidance for Operating Segments
Question
Does the company anticipate any changes to the full-year guidance for organic sales growth and constant currency operating profit growth for its operating segments, given the strong start to the year?
Answer
The guidance remains broadly in line with the long-term algorithms, with some adjustments due to factors like currency devaluation in Nigeria and the team’s pricing actions to address it.
North America Volume Trends and Pricing
Question
Is the company’s previous guidance for low single-digit organic sales growth in North America Snacks still valid, and how does the company expect the balance between price and volume to play out this year?
Answer
The company acknowledges a historical trend of higher prices and lower volumes in the past 18 months but anticipates a reversal with improving volume performance, particularly in the back half of the year.
The company is optimistic about the return of a healthier balance between price and volume, driven by full merchandising activity, brand investments, and share gains.
Supply Chain Performance and Productivity
Question
How has the supply chain performance evolved, and what are the implications for growth spending and productivity initiatives?
Answer
The supply chain is currently performing at a high level, with on-time and in-full metrics comparable to pre-pandemic levels, providing confidence in growth investments and commercial activation.
Net Impact of Volume Leverage and Price Investments on Margins
Question
Considering the benefits of volume leverage throughout the year and the price investments being made, how will these factors collectively impact margins?
Answer
While there are various moving parts influencing margins, including inflation, supply chain improvements, and price mix moderation, the company is confident in continued gross margin expansion, albeit at a slower pace than in the first quarter, with margins expected to exceed 35% for the full year.
Cheez-It International Expansion
Question
Can you provide an overview of the Cheez-It international expansion initiative, highlighting key aspects to monitor throughout 2024 and beyond?
Answer
The company is excited about the international prospects for Cheez-It, with successful launches in Canada, Mexico, and Brazil, and a planned launch in Europe, particularly the U.K., later this year.
The approach is pragmatic, focusing on building a playbook through market-by-market launches, with further expansions into additional markets expected in 2025 and beyond.
